20220504-招银国际-China_5G_Sector__Defensive_play_with_upside_potential_11页_893kb

China 5G Sector Summary

Core Content

China has made substantial progress in 5G infrastructure development, with 1.4 million 5G base stations installed by the end of 2021 and ~800 million 5G users, the largest in the world. Despite a slight decline in 5G-related capital expenditure (capex) in 2022, the overall telco capex is expected to grow by 3.5% YoY. The 14th Five-Year Plan emphasizes the development of a world's most extensive standalone 5G network, which will drive future growth.

Main Points

• Telco Capex Outlook:

  • Overall telco capex will grow by 3.5% YoY in 2022.
  • 5G-related capex will decline slightly by 3.1% YoY, mainly due to a de-spec trend in 5G base station deployment.
  • The pace of 5G BTS deployment is expected to slow down to an average of 516k per year in 2023-2025, down from 640k/650k in 2020-2021.
  • By 2025, 3.64 million 5G BTS are planned to be deployed, with a target of 26 base stations per 10k people.

• Dividend Yields:

  • H shares of China Mobile, China Telecom, and China Unicom have high dividend yields.
  • China Mobile and China Telecom plan to increase their dividend payout ratio from 60% to 70% within three years after A share listing.
  • China Telecom has already announced interim dividends from 2022 onward.

• China Tower (788 HK, HOLD):

  • Revenue growth has been steady, with 6.4% / 6.1% / 6.8% YoY growth in 2019-2021.
  • Core tower business accounts for 88% of total FY21 revenue.
  • Telco expenses for China Tower services have declined, from 7% to 3% of total COGS.
  • The service contract renewal may lead to lower leasing fees, which could persist as a headwind.

• ZTE (763 HK, BUY):

  • ZTE is expected to outperform peers due to share gains in 5G BTS and other telecom markets.
  • Carrier revenue growth is forecasted at 6.1% vs. 3.5% for telcos.
  • ZTE's share in 5G BTS deployment is expected to rise to 35% in 2022.
  • Overall revenue growth is forecasted at 13.3% YoY in 2022, driven by consumer and government/enterprise business.

Key Information

• 5G Deployment:

  • 5G network coverage is now achieved in all cities, counties, and certain developed towns.
  • 75-80% of new smartphones sold in the last twelve months were 5G models.

• Market Trends:

  • Telcos are shifting investment focus towards industrial digitalization, IDC, and cloud resources.
  • China Telecom allocated 30% of its 2022E capex to industrial digitalization, a 62% YoY increase.

• Valuation Table:

Summary of Key Players

• China Mobile (941 HK, NR):

  • Mobile ARPU: RMB48.8
  • 5G ARPU: RMB82.8
  • NPM: 13.7%

• China Telecom (728 HK, NR):

  • Mobile ARPU: RMB45.0
  • 5G ARPU: RMB53.3 (declined from RMB65.6)
  • NPM: 6.0%

• China Unicom (762 HK, NR):

  • Mobile ARPU: RMB43.9
  • 5G ARPU: RMB46.0
  • NPM: 4.4%

Summary of Key Equipment Providers

• ZTE (763 HK, BUY):

  • Carrier revenue growth: 6.1% YoY
  • Share in 5G BTS deployment: 35% in 2022
  • Overall revenue growth: 13.3% YoY
  • P/E (x) FY22E: 8.3
  • ROE (%): 13.4
  • Dividend Yield: 1.0%

• China Tower (788 HK, HOLD):

  • Revenue growth: 6.2% / 5.2% YoY for 2022-23E
  • Core tower business: 3.4% YoY growth
  • Other segments: 23.0% / 35.2% / 121.5% YoY growth for DAS/TSSAI/energy
  • P/E (x) FY22E: 14.7
  • ROE (%): 4.6
  • Dividend Yield: 4.4%

Conclusion

The China 5G sector is showing signs of maturity and diversification. While 5G-related investments are expected to slow, the overall telco capex is still growing. ZTE is highlighted as a BUY due to its share gains and strong revenue growth. China Tower is a HOLD due to ongoing headwinds. China telecom operators are considered safe plays with high dividend yields and less geopolitical exposure.